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Shares of
Men's Wearhouse
came apart at the seams last week after the retailer of men's tailored clothing reported disappointing third-quarter earnings and sharply reduced its fourth-quarter and full-year profit guidance. The stock opened 12.5% lower on Thursday morning, and ended the week off 6%, at $30.48.

There is no way to spiff up such a performance, but there are reasons to think the picture will brighten next year. With 1,144 stores in the U.S. and Canada and a 22% share of the men's specialty-store market, according to IBISWorld, Men's Wearhouse is well positioned to capitalize on several positive trends, including a better employment outlook and updated, slimmer-fitting fashions, that are driving more men to -- yes, shop.

What's more, the bad news seems fully reflected in the company's shares (MW). After its dressing-down, Men's Wearhouse trades for just 10.3 times estimated earnings of $2.97 a share for the fiscal year ending January 2014. That's well below other specialty-apparel chains and near the bottom of the company's historic valuation range. Back out $2.71 in net cash per share, and the price/earnings ratio is even lower. If traffic rebounds next year, as expected, the shares could rally 25%, to $38. Investors can console themselves with a 2.4% dividend yield while they wait.

Men's Wearhouse is "a good story with growth drivers," says Matthew Spitznagle, an analyst at Eagle Asset Management, which owns shares. "The near-term weakness is a blip."

Ironically, the company has enjoyed strong sales growth this year, with third-quarter same-store sales rising 9.5% at the flagship Men's Wearhouse chain. November was another story, however, as sales at stores open at least a year fell from year-ago levels, a setback that management blamed on Hurricane Sandy, the presidential election, and fiscal-cliff fears.

Earnings have been impressive, as well, rising 20% in the latest quarter, to 95 cents a share. But not impressive enough: The Street was expecting two pennies more. The company compounded its woes by warning it could lose up to five cents a share in the current quarter or earn as much as a penny, well below its prior guidance of 12 cents to 15 cents in profit. Its full-year profit outlook fell to $2.57 to $2.63 a share from a previous $2.74 to $2.80. In fiscal 2011, Men's Wearhouse earned $124.5 million, or $2.38 a share, on revenue of $2.4 billion.

Fourth-quarter losses aren't uncommon for the retailer, as fewer men buy suits around the holidays. But when the calendar turns, sales tend to bounce back. That could happen again in 2013, especially as new, slimmer fits entice customers to shop. While women's fashions refresh every season, men's tailored clothing takes years to evolve. But when new styles finally arrive, suit sales tend to rise sharply. Slim-fit suits account for "20% to 30% of the business and [are] growing at a rapid rate," CEO Douglas Ewert said Thursday on the company's third-quarter earnings call.

Recent Price

$30.48

52 Week High-Low

$25.97-$40.97

Market Value

$1.5 billion

Revenue 2012E

$2.5 billion

Net Income 2012E

$133 million

EPS 2012E

$2.65

EPS 2013E

$2.97

P/E 2013E

10.3

Dividend Yield

2.4%

No. of Stores

1,144

E=Estimate. Fiscal year ends the following January.

Sources: FactSet, Company reports

The trend is "still accelerating," he later explained to Barron's. "We believe we're attracting a new customer, too."

Men's Wearhouse has successfully sold suits in tough economies before and ridden style trends to higher sales. George Zimmer, a hippie-turned-capitalist, founded the first Men's Wearhouse in Houston in 1973. More recently, he has become famous as the bearded guy with the baritone voice in the company's commercials, who proclaims, "You're going to like the way you look. I guarantee it." Zimmer is now chairman.

MEN'S WEARHOUSE OPERATES through four divisions. Its traditional Men's Wearhouse stores, which target middle- and upper-middle-income men and include tuxedo-rental operations, account for about two-thirds of sales. K&G stores, which target lower-income buyers and sell women's clothes, contribute about 15% but have struggled in recent months. Moores, the company's Canadian division, chips in 10% to 12% of sales, and the corporate-apparel segment, including uniforms, accounts for the rest. The tuxedo business has helped the company's profitability in recent years, as it boasts gross profit margins of 86.8%, compared with margins closer to 50% on retail clothing.

Menswear might be predictable, but it is more vulnerable to economic downturns than other retail segments. Sales correlate closely to employment trends. Men's Wearhouse sales fell 10% between 2007 and 2009, and operating margins dropped below 5% in 2008.

The Bottom Line

Men's Wearhouse shares unraveled last week, losing 6% after the company offered weak profit guidance. As traffic rebounds, the stock could rally 25%, to $38 a share.

The company has rebounded partially from the depths, but could be derailed by another recession. It also faces stiff competition from rivals like Jos. A Bank, which tends to offer more aggressive promotions. Management, undeterred, is developing fresh plans to expand the franchise in coming years. Men's Wearhouse has been rolling out new outlet shops to reach customers looking for less expensive merchandise, and also expects to enlarge its traditional store base to at least 750 from 625. The company's ample cash flow -- it generates more than $150 million per year -- and unblemished balance sheet give it plenty of room to grow.

Men's Wearhouse is like a fine suit with a few wrinkles. And it is selling at a very nice discount.